Bear Market That Wasn't Gores Pessimists Amid S&P 500 Rebound
Investors who heeded warnings about falling home sales, record European budget deficits and the debasement of the U.S. dollar can nurse regrets after the 2010 bear market didn’t happen.
The Standard & Poor’s 500 Index has gained 9.7 percent this year and 20 percent since hitting its 2010 low on July 2, defying pessimists from Robert Prechter to Albert Edwards and Nouriel Roubini, who expected an economic slowdown that hurt equities. Bulls, who looked like losers when the benchmark gauge for U.S. stocks fell 16 percent between April and July, were vindicated by the rebound that added $2.6 trillion in value.
Expanding factory production, retail sales and earnings that topped forecasts as well as the Federal Reserve’s pledge to buy $600 billion of Treasuries spurred the advance as the economy continued to recover from the worst financial crisis since the Great Depression. U.S. equity mutual funds with at least $1 billion in assets returned a median 7.7 percent in the past five months, according to data compiled by Bloomberg.
“You still have an investment culture that’s still too heavily steeped in the most recent experience rather than rationally basing it on the evidence of the day,” said James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management Inc., which manages $342 billion. “We had such a terrible crisis of ‘08,” he said. “It’s not surprising to me that the first slowdown of the recovery brought back deflation-depression mentalities with vengeance.”
Pessimists gained evidence for their concern midyear. The Citigroup Economic Surprise Index for the U.S. tumbled to minus 64.3 in August from positive 43.4 in April as Europe’s debt crisis prompted speculation growth would slow. Negative readings mean economic reports are missing forecasts.
A. Gary Shilling, who predicted the housing market collapse, said in August that the economy “doesn’t have much gas anymore” and may enter a second recession. While the increase in gross domestic product slowed to a 1.7 percent rate in the second quarter, it accelerated to 2.5 percent in the third quarter, according to Commerce Department data.
The economy should be expanding 5 percent given the depth of the recession, and investors should avoid equities until corporate revenue growth accelerates, Shilling said last week.
“We’re in a period of slow growth, probably deflation, and enough troubles elsewhere like Europe that the dollar and Treasuries are going to be the safe havens,” said Shilling, president of the investment research firm A. Gary Shilling & Co. in Springfield, New Jersey. “The equity markets have been anticipating a lot faster growth ahead than we’re likely to get, and there could be some disappointment.”
The U.S. will grow 2.7 percent in 2010, 2.5 percent in 2011 and 3 percent in 2012, according to the median of 63 GDP estimates in a Bloomberg News survey. The National Bureau of Economic Research said Sept. 20 that the longest contraction since the 1930s ended in June 2009.
The S&P 500 has gained 7.3 percent since Prechter in September recommended holding money in cash because pessimism would drive investors away from stocks. Technical analysis, or the process of using price charts to make investment forecasts, shows the S&P 500 will fall, he said last week. Investors should wait six years before buying stocks, he said.
The S&P 500 slipped 0.1 percent to 1,223.12 today after Fed Chairman Ben S. Bernanke said the world’s largest economy may need more stimulus.
“Bottoms are usually sharp, whereas tops often take time to play out,” Prechter, the chief executive officer of Elliot Wave International in Gainsville, Georgia, wrote in a Dec. 3 e- mail to Bloomberg News. “It is perfectly natural for GDP to rise after the stock market rises. You can’t use GDP to make buying and selling decisions in the stock market.”
Edwards, the London-based global strategist for Societe Generale who warned this year that the world was entering another recession and that deflation was a possibility, said in August that the S&P 500 would plunge to about 450. It’s risen 17 percent since then.
“The structural bear market has not reached the end,” Edwards wrote in an Aug. 26 note, a day before Bernanke signaled he’d buy more bonds. “The equity market has shrugged off much of the weaker data that abounds, and has not joined the bond market in a perceptive move. The equity market will though crumble like the house of cards it is.”
Edwards didn’t respond to an e-mailed request for comment last week.
An Institute for Supply Management report showed last week that U.S. manufacturing expanded for a 16th month in November. Pending sales of U.S. existing houses unexpectedly jumped by a record 10 percent in October, the National Association of Realtors said Dec. 2. While the Labor Department said on Dec. 3 that American non-farm payrolls expanded 74 percent less than the median economist estimate, the S&P 500 rose 0.3 percent.
Roubini, the co-founder of Roubini Global Economics LLC who recommended selling stocks before the S&P 500 slid as much as 57 percent from its record in October 2007, said in July that the market will fall and has held to his bearish outlook on the global economy throughout 2010. The economy will suffer as Americans cut debt, spend less and save more, implying an “anemic” recovery, he said last month.
“Roubini Global Economics does not call the markets, but comments about fundamental direction,” according to a Dec. 3 statement from the New York-based company.
The S&P 500 climbed 3 percent between Nov. 26 and Dec. 3, the biggest weekly advance in a month.
“A lot of the bears I think were overly obsessed with the secular challenges facing the economy and ignoring the cyclical improvement,” said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees $63 billion. “At the end of the day, should you be involved with stocks or not? The answer is, ‘Yes, you should.’”
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